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Reynolds American Reportedly Eyeing Lorillard

March 3, 2014, 04:50 pm

NEW YORK -- Early trading of Lorillard Inc.'s stock took off this morning as industry buzz grew over Reynolds American Inc. (RAI) possibly preparing a bid to buy its Greensboro, N.C.-based competitor. The New York Stock Exchange-listed stock traded at $53 per share, up 8 percent on the day.

According to Bonnie Herzog, managing director of tobacco, beverage and consumer research at Wells Fargo Securities LLC, Winston-Salem, N.C.-based RAI is reportedly prepping a bid for Lorillard at $60 a share. Neither company has commented on the report.

"Though we have long believed Lorillard may combine with another tobacco company and this has been part of our long-term bullish thesis on the stock, we question the timing of this since we'd think RAI would wait for further clarity on the [Food and Drug Administration's] potential recommendation on menthol regulation, and e-cig regulation to a lesser extent, before pursuing a deal," Herzog said.

Currently, Lorillard and RAI together own 67 percent of the menthol market. If an agreement were to be reached between the No. 2 and No. 3 tobacco companies, the Federal Trade Commission could ultimately approve a deal/combination taking cues from the beer industry, although it's likely brands would need to be divested, Herzog explained.

Any deal would have some merits, she added, including:

Lorillard and RAI together would be stronger to compete against industry leader The Altria Group Inc.

Substantial cost savings and synergies.

The general tobacco environment could become more rational.

"Therefore, we think a fair takeout price would be much higher than the $60 RAI is rumored to be offering," she said, adding that there are many reasons to own Lorillard stock and "a potential deal would just be icing on the cake."

Herzog also questioned how RAI would finance a bid for Lorillard.

"We think a more likely deal could be a merger between Lorillard and RAI rather than an acquisition," she said. "Also, there has been speculation that British American Tobacco (BAT), which currently owns approximately 42 percent of RAI's stock, could take a majority stake in RAI after the standstill ends in July 2014. While we believe the most likely scenario is that BAT and RAI could reach a strategic partnership to market/sell e-cigs globally, we wouldn't rule out BAT taking a majority stake in RAI. Furthermore, if this occurs, BAT could help finance a potential acquisition of Lorillard."